This Giant Is Not Getting up Anytime Soon

Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Microsoft’s (NASDAQ: MSFT) shares plummeted over 10% within a span of four days after it announced lower than expected results for the fourth quarter of fiscal 2013. The last few quarters have seen Microsoft battling the gradual decline in PC demand by churning out new products and entering the new and revolutionary world of tablet and mobile devices. Of late, Microsoft has become an ardent follower of the “learning from mistakes” philosophy rather than “doing it right the first time.” May it be the reversal of policies with the new Xbox One or introducing the start button in Windows 8, Microsoft has not been hugely successful the first time.

Lower than expected results because of falling PC demand

For the fourth quarter of fiscal 2013 revenue inched up by a mere 3% to $19.2 billion, whereas the earnings per share declined a massive 19%, to $0.59, from the year ago period. The main reason behind poor results was a decline in the overall performance of its Windows division owing to a sluggish PC demand. As a result of the constant decline in PC demand, hardware and software manufacturers have been facing a tough time. Hence, Microsoft is putting in tremendous effort to enter the revolutionary tablet and mobile markets with its new OS, Windows 8, that is gaining traction.

Surface tablets are a big miss

One big miss for Microsoft in the last year has been its Surface range of tablet devices that come in a couple of versions. The motive behind launching Surface was to promote the use of Windows 8 in the modern era of computing. However, Surface has failed to connect with customers as the company expected, compelling the company to reduce its price by $150 to $349. As the company reduced price of the Surface RT, it had to recognize a charge of $900 million to its income statement on account of inventory adjustment. This had a net effect of $0.07 on the EPS.

In my opinion, this massive reduction in price is also going to affect Microsoft’s hardware partners like HP and Asus. When Microsoft entered the tablet market with Surface, it declared direct competition against its hardware partners who had started implementing the RT version of Windows operating system in its devices. Now, this price reduction will discourage the manufacturers from developing Windows RT powered tablets that will ultimately lead to lower usage of the OS. Thus, the overall adoption of Windows RT will suffer, compromising Microsoft’s essential motive of increasing its adoption.

Google is racing ahead

As I had mentioned in one of my earlier articles, Windows 8 failed to get the attention of users because it lacked a stellar collection of killer apps. While Microsoft has been really working hard on apps, Google’s (NASDAQ: GOOG) Android is running in a completely different league. While Android is an unparalleled platform for smartphone users, Microsoft’s Office 365 fares better compared to Google apps for business. The Office 365 is now at a $1.5 billion run rate as Microsoft has announced its expansion in over 125 markets worldwide.

Reportedly, Google’s Motorola division is all set to publicly launch its much anticipated phone, Moto X, in the next month. Hopefully, it will turn around Motorola’s fate, which has been generating losses since acquisition by Google, hurting its overall profit margins.

American multinational corporations like Google and Apple (NASDAQ: AAPL) have now come on the radar of regulators across the globe for shifting revenue to countries that have a lenient tax regime. This will have a big impact on net earnings for these companies, who have quite cleverly lowered their tax burden by tying up revenue to tax havens.

Apple is no prize either

While Microsoft has had a tough time in the last year, Apple also did not enjoy a favorable run on Wall Street. Apple’s share price has declined approximately 30% in the last 12 months owing to skepticism around innovation and designs, legal issues and stiff competition from Samsung in the smartphone market. Apple’s next generation iPhone 5S has been caught up in production issues pushing the official launch to end of September. In all probability, it will affect the overall demand as customers might move on to other available options.

Since the company has not executed any major developments in the quarter, there are minimal chances that its results will appease investors. As this mashable article points out, Apple is witnessing its longest product drought in recent times. This is definitely not encouraging news for a company that is famed for building new and superb products.

Microsoft is moving in every direction

For years, I have been a Microsoft aficionado because of its products that always had one very essential attribute: user-friendliness. While Apple built products that were about design, Microsoft got down to simple and basic products that could be easily used by people at large. I am not saying that its products are not user-friendly any more but I definitely believe that the company is steering in various directions without robust results in any one.

Since the PC industry is dying slowly, Microsoft already has enough challenges to combat. However, its decision to enter the tablet markets with both hardware and software was not a sound one because the company does not specialize in hardware. It has already incurred a $900 million charge because of the price reduction with Surface RT tablets. In my opinion, the big problem with Microsoft is that it’s riding many horses at once, which is not helping it achieve desired results.

Final words

Microsoft’s constant decline in revenues due to sluggish PC demand is not a big concern as of now because it is destined to happen. In the fourth quarter, a decline of 20% in consumer PC demand led to a decline of 15% in OEM revenues. The current challenge for the company is to steer away from tough conditions by focusing on its crucial product, Windows 8. I would not suggest investing in the stock because the company is nowhere near a robust turnaround and hence, it would be unwise to put a bet on the stock.

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Mihir Mehta owns shares of Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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